A Smart Profit Booking Strategy for Long Term SIP Investors

Mutual Funds have seen record breaking levels of interest in recent times. It is estimated that nearly Rs. 7000 Crores of new investments flow into Mutual Fund investments through SIP’s today. No doubt, more and more investors are beginning to believe that for long-term wealth creation, Mutual Funds Sahi Hai!


Most Equity Mutual Fund SIP investors start their investments for their long-term goals and (rightfully) intend to hold on to their equity investments for long. However, there are a few compelling reasons at the moment, for adopting a slightly more circumspect approach towards equity-oriented investments. For instance:


  • Valuation multiples are at record highs. The P/E multiple of the NIFTY is > 28X and the Market Cap: GDP ratio is > 85% (the historical average is 75%). Mid and Small cap valuations are even more stretched (53X and 94X times earnings respectively, despite the correction!)

  • Earnings growth has remained muted at around 7% y-o-y for the first quarter for NIFTY companies. The fact that markets are booming despite the absence of robust earnings growth, raises worries of bubble like valuations forming, which requires only one trigger to start correcting heavily – we cannot predict what this trigger will be, or when it will come – but the risks are very high

  • The Rupee has been falling heavily and has dropped to $70 recently. Crude remains high at 75$/bbl. Together, these two factors don’t augur well for macros such as Fiscal Deficits and Current Account Deficits.

  • The global trade war between US and China could lead to collateral damage for Asian emerging markets, including India


As a result of the above, Equity Mutual Fund investors who started SIP’s for their long-term goals now find themselves in a peculiar conundrum. Should they take some sort of action on their portfolios, or not?


Here’s what we, at FinEdge, recommend doing. Calculate your available load-free units in your equity fund investments (if you’ve been running SIP’s, every tranche may not be load free just as yet). Now switch these load free units to a liquid fund of the same AMC. But don’t just sit tight there! Immediately begin an STP (Systematic Transfer Plan) with a duration of 18 months, from the liquid fund – either back to the same equity fund, or to a multi-cap fund within the same AMC. Your Advisor can help you with the decision of which funds to start your STP’s into.


Why should you do this? Let’s try and explain this to you in simple terms. Imagine your equity investments to be a ‘vehicle’ of long term wealth creation, and your ‘journey’ towards wealth creation to be a winding road full of crests and troughs, leading up to the mountaintop of ‘goal achievement’. Now, imagine, that you are reasonably certain that based on rational analysis, a rocky patch of stormy weather lies ahead of you, and this patch is expected to last for a year to a year and a half. The best approach would be to temporarily slow down your ‘vehicle’ (in a way, becoming more ‘risk off’) to avoid the storm, while systematically accelerating your vehicle again (after all, you have confidence that equities are indeed the bet vehicle for long term wealth creation). That’s precisely what we’re advising you to do here!


Two points to note here. One, continue your existing SIP’s even after you switch your load free lump sum amount. After all, if markets do correct, you’ll end up accumulating extra units and this will stand you in good stead in the long run. Two, do not under any circumstances redeem the money into your account! It will get spent, or you’ll end up sitting on the fences forever – in other words, your vehice will break down. Simply switch the moneys within the same AMC and start your STP’s, letting them continue dispassionately thereafter.